Building pension funds
Following the recent spate of UAE visa law reforms, the mindset of retirement planning must be applied to the built environment at the federal level
The UAE Cabinet has recently announced special residency visa privileges for expatriate retirees who wish to remain in the country after working age. The announcement of these visas, to be granted to people that meet certain financial conditions, has received a largely positive response – and has sparked discussion about just how much money one needs to be able to retire and live comfortably in the UAE.
Rather than get wrapped up in that discussion, I would instead like to highlight how the example of forward-thinking financial planning can be transferred almost seamlessly into the world of property management through the operation of the humble sinking fund.
WHAT IS A SINKING FUND?
There are many variables to consider in answering the question of how much money you might need when you retire. Where you plan to retire, your expected age at retirement, and what quality of life you expect to maintain, will all need to be taken into consideration.
Similarly, in the property management industry, the cost of replacement, and when assets are likely to reach the end of their life cycle, are important considerations. And the date by which replacement will become necessary will be relatively fixed, based on manufacturer’s guidelines, recognised performance criteria, local operating conditions, and the level of maintenance that has been applied during the course of the asset’s operation.
Sinking funds, therefore, attempt to answer the question of how much capital is required to allow an asset to ‘retire’ and be replaced. In this respect, sinking funds can be thought of as pension funds for buildings, although elements of properties tend to retire at different points during the property’s life cycle, rather than the entire property retiring at once.
The concept of ensuring that funds are in place to allow for these asset retirements is similar to a pension plan that provides enough funds to allow for a person’s retirement. The crucial difference is that if an individual does not achieve the level of savings required for retirement, they may need to work a little longer, whereas built assets may not necessarily have this flexibility.
AVOID AT YOUR OWN RISK
The risk of not having sufficient funds in place at the end of a built asset’s life expectancy is effectively asset failure, which can potentially have an impact on a property’s function, business operations, revenue, and reputation.
The operation of assets beyond their expected life cycle – successfully or not – is widely seen in the Middle East, and indeed around the world. However, the reasons for doing so differ from one location to another. In fact, it is more likely to be seen in emerging and developing markets due to a lack of planning, or their relative inexperience in understanding the necessary balance between obtaining maximum value from an asset and mitigating the risk associated with its failure.
Sinking funds mitigate this risk by providing not only a forecast of the asset’s replacement date – in conjunction with life cycle cost analyses – but also of the associated replacement costs, determining how much capital needs to be put aside each year to ensure that these funds are available when needed.
SINKING FUNDS IN THE UAE
It should come as no surprise that the operation of a sinking fund when managing property is considered best practice and is critical to effective property management. The UAE already recognises this.
Dubai’s Real Estate Regulatory Authority requires owners’ associations – and, therefore, their appointed agents – to show sinking fund contributions in service charge budgets. These contributions must be based on a study of the assets that the sinking fund is intended to cover.
The mindset of retirement planning now needs to be applied to the built environment in the UAE at the federal level.